It is 11 pm and I just came across this in the past hour, I hope I haven’t made a glaring error. The ETF TIP tracks inflation protected securities. As such it normally follows 5 and 10 year break even rates closely, and it has done all year until January 24th when it diverged. First it diverged by staying flat while inflation expectations continued to rise, but then around Feb 11th it started to fall while expectations still rose, dropping from ~128 to under 125 (and after hours today it fell to 124.50). This is odd on its own, but starting at the same time as this divergence the Fed picked up its purchasing program, from the July low the balance sheet expanded by ~$40 billion a month, but from Jan 24th to Feb 24th it jumped $185 billion.
If I haven’t missed something serious the most direct interpretation would be that the Fed has recently started buying a large number of inflation protected bonds to drive up expectations while the market has been selling them, and as long as the Fed isn’t buying the TIP ETF directly this is causing the divergence. The logical (in terms of Fed logic) reason to do this is because the short end of the curve is near zero and the Fed has resisted negative rates, but one way to stimulate (again according to Fed logic) would be to push inflation expectations up which lowers the real return of those bonds that are sitting... (More)